Constant regulatory tinkering and tax relief uncertainty send out a bad message about pensions and stifle innovation, according to the PLSA's new chair Lesley Williams. Speaking to Stephanie Baxter, she wonders if we have lost our way
At a glance
- Williams thinks further policy changes should be put on hold to allow innovation
- Tax relief consultation is sending out message that ‘pensions are bad’
- Most people will not use guidance or advice so we need defaults
It has been a busy year for the industry as it dealt with some of the biggest ever pension reforms to be introduced by government. The hard work is only just beginning as the true impact of the changes will start to be felt over the next few months, with the daunting prospect of yet more to come from the Tories such as upturning the tax relief regime.
Lesley Williams who took over from Ruston Smith last October to chair the Pensions and Lifetime Savings Association (PLSA), arrived at an important juncture for the trade body as it rebranded from the National Association of Pension Funds. Much more than a mere name change, it is a clear sign that the retirement savings landscape is changing and is not just about pensions any more.
Bad message about pensions
Williams, who is also in charge of Whitbread's corporate pensions strategy, is frustrated that "all savers seem to hear nowadays is that pensions are bad". She thinks this is mostly down to the constant hit on the sector by the chancellor's regulatory tinkering.
"The message that keeps coming out is that ‘pensions are bad, pensions are bad'. The chancellor makes so many changes that send a message that pensions are no longer a good thing to save into," she says.
She is particularly annoyed about George Osborne's review into the tax relief system as it suggests to people that the government lacks confidence in pensions. This year the government will respond to the consultation that ended in 2015 and could result in a move from the current exempt, exempt, tax system to a tax, exempt, exempt system. Even recent changes that only affect higher earners such as annual allowance cuts create a negative impression for everyone, says Williams.
"I think the PLSA, the wider industry, government and regulators should all think about what it feels like for savers every time you put out a bad message about pensions."
This will mean putting savers at the heart of everything: how does it feel for them and what are we doing for them? "I'm a believer in setting a strategy, working it through and being clear about it to people," she says.
For example, is the tax consultation about people saving in pensions or is it really about a tax take? "If it's the latter we should be honest about it," she says.
WATCH NOW: Lesley Williams speaks about what she wants to achieve as PLSA chairwoman and her fears about pension policy
Have we lost our way?
The problem for the industry is that it is unclear what direction the government is actually going in as its recent approach seems very piecemeal. Williams wants to know what the government is setting out for future pension provision as its approach does not appear to be long term and wonders "if we have lost our way a bit?"
One regulation that she is particularly worried about is the 0.75% charge cap, which was introduced last April in defined contribution (DC) schemes to squeeze fees and has meant many schemes will likely have had to change investment funds.
"Particularly in these [current] markets the impact of the cap in my scheme has not been good because we were in an ‘expensive' fund that exceeded the cap that would have performed quite well through these times," she says.
She also warns that constant tinkering to policy is stifling innovation, and is made even worse by the tax consultation.
"I wonder how many people like me are holding on for the government to announce what comes after tax consultation. If that wasn't looming I think we'd be focusing on innovating for freedom and choice, bedding down decent communications, and working through things like how to get people increasing their contributions. At the moment we're all waiting as we think there will be a massive change. We need to understand that before we commit ourselves to doing good."
Given there has been so much change, innovation clearly needs to come through. Williams praises the industry for being good at innovating but points out that "we need time to do it rather than constantly fire-fighting".
"The industry has dealt really well with auto-enrolment (AE), and the flexibilities we've delivered in almost impossible timescales," she says. "It has been a success because we have made it a success. But we do need innovation around defaults and products that support flexibility."
Build good defaults
Williams is a big fan of defaults as she is highly sceptical about relying on guidance and advice to ensure people have enough money in retirement. While guidance and advice are good things she is a realist and knows people are not going to use them.
"Our research shows people don't go to financial advisers – if they don't we can't bury our heads in the sand about lack of engagement and people not going to seek advice."
She continues: "We need to face it, listen to them and build a pensions delivery system that helps them through it rather than one that says ‘it's you're problem, go to Pension wise and make your own decisions'. Because then we'll end up with a whole raft of people who do the wrong thing or don't know what to do and end up stuck without a decision. It's our place to help them."
Williams is just as scathing about the complexity in pensions as her predecessor Smith who many people will remember for regularly saying, "junk the jargon".
Her big bugbear is things that have ended up being bolted together that are highly complex and have resulted in too much waffle with the biggest culprit undoubtedly the ‘uncrystallised fund pension lump sum' (UFPLS).
She says: "Why does it have to be so complicated, why did we let it happen? I'm not sure that we on the industry side can say the government did that, as we were probably trying to please ourselves without thinking of the saver at the end who just wants to take a lump sum as cash."
It also means that a lot of money is spent to cope with this complexity. She asks, "Does any of that benefit savers?" and agrees that it sometimes seems as though the saver has been completely forgotten.
It is not just savers that struggle – the complexity even baffles trustees. Williams mentions a new trustee on the Whitbread pension scheme who wanted to learn about the different ways to take cash at retirement and could not understand why something that should be relatively simple was so complex.
Too much complexity
One area that Williams thinks is particularly complicated is AE regulation. While many large employers like Whitbread have already implemented AE, there is a large group of small and medium-sized employers that have not yet and are likely to find it a big challenge. The Pensions Regulator (TPR) has given several warnings about this, pointing out firms that miss their deadlines for compliance will face fines.
Williams says: "TPR is interested in the fundamentals – getting schemes up and running and working, but the details of AE legislation is massively complicated, what with postponement periods, how you measure earnings. It's a whole new kettle of new jargon even for a pensions person and it's easy to get bits of it wrong. Imagine an employer putting a scheme into place for first time, doing all the work, and then someone comes along and says ‘we're changing the tax regime now'."
Changes to pension tax relief would be a nightmare scenario not just for employers but also for the whole industry. Unfortunately for savers, it means that much-needed innovation to help them achieve good outcomes in retirement will almost certainly be put on hold until the government's plans are revealed. Even if Osborne decides not to meddle with the tax regime, the bad message it sends to savers about pensions could end up causing lasting damage.
Lesley Williams is group pensions director at Whitbread, with responsibility for corporate pensions strategy and to the trustee company for the operation of the pension fund and its investments.
The Whitbread pension fund has a closed DB and open DC section. She has held a non-executive directorship/director role at the PLSA, formerly the NAPF, since 2011 and currently chairs its DC council.
Lesley has worked in the pensions industry for over 20 years, with previous positions in Gateway Foodmarkets, Abbey National, the Pearl Group and she was head of pensions at the Henderson Group.
The Pensions Regulator (TPR) has substantially increased the usage of its powers against trustees – posting a sharp rise in the use of formal information gathering powers and High Court production orders during the three months to the end of September....
More than half of BlackRock’s flagship UK defined contribution (DC) default fund’s assets will be invested in ESG strategies by June 2021.
The Pension Schemes Bill has completed its third reading, crossing its latest hurdle in the House of Commons.
An amendment to the Pensions Schemes Bill which would have seen people given a pre-booked Pension Wise appointment ahead of accessing their retirement savings has been defeated.
A proposal to ensure savers receive a Pension Wise appointment prior to accessing their retirement pot has received cross-party support in parliament, while Labour seeks net-zero pensions by 2050.